Taxation and Business Strategy Test
Questions
Course Introduction
This course explores the intersection of taxation and business decision-making, focusing on how tax considerations influence firm structure, investment, financing, and operational strategies. Students will examine tax planning techniques, the impact of tax policy changes on business behavior, and the role of taxation in mergers, acquisitions, and international operations. Through case studies and real-world examples, the course highlights how effective tax strategies can enhance organizational value while meeting compliance requirements. Emphasis is placed on integrating tax planning with broader business strategies to achieve sustainable competitive advantages.
Recommended Textbook
South Western Federal Taxation 2013 Comprehensive Edition by William H. Hoffman
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Page 2
Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Q1) For omissions from gross income in excess of 25% of that reported, there is no statute of limitations on additional income tax assessments by the IRS.
A)True
B)False
Answer: False
Q2) No state has offered an income tax amnesty program more than once.
A)True
B)False
Answer: False
Q3) Which, if any, of the following provisions cannot be justified as mitigating the effect of the annual accounting period concept?
A)Nonrecognition of gain allowed for involuntary conversions.
B)Net operating loss carryback and carryover provisions.
C)Carry over of excess charitable contributions.
D)Use of the installment method to recognize gain.
E)Carry over of excess capital losses.
Answer: A
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Page 3
Chapter 2: Working With the Tax Law
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Q1) Which court decision would probably carry more weight?
A)Regular U.S.Tax Court decision.
B)Reviewed U.S.Tax Court decision.
C)U.S.District Court decision.
D)Memorandum Tax Court decision.
E)U.S.Court of Federal Claims.
Answer: B
Q2) The Index to Federal Tax Articles (published by Warren, Gorham, and Lamont) is available in print and electronic formats.
A)True
B)False
Answer: False
Q3) The following citation can be a correct citation: Rev.Rul.95-271, I.R.B.No.54, 18. A)True
B)False
Answer: False
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Chapter 3: Computing the Tax
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Q1) In 2012, Ed is 66 and single.If he has itemized deductions of $7,300, he should claim the standard deduction alternative.
A)True
B)False
Answer: True
Q2) In terms of income tax consequences, abandoned spouses are treated the same way as married persons filing separate returns.
A)True
B)False
Answer: False
Q3) Butch and Minerva are divorced in December of 2012.Since they were married for more than one-half of the year, they are considered asmarried for 2012.
A)True
B)False
Answer: False
Q4) A child who is married can be subject to the kiddie tax.
A)True
B)False Answer: True
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Chapter 4: Gross Income: Concepts and Inclusions
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Q1) In December 2012, Mary collected the December 2012 and January 2013 rent from a tenant.Mary is a cash basis taxpayer.The amount collected in December 2012 for the 2013 rent should be included in her 2013 gross income.
A)True
B)False
Q2) The effects of a below-market loan for $100,000 made by a corporation to its chief executive officer as an enticement to get him to remain with the company are:
A)The corporation has imputed interest income and the employee is deemed to have received a gift.
B)The corporation has imputed interest income and dividends paid.
C)The employee has no income unless the funds are invested and produce investment income for the year.
D)The employee has imputed compensation income and the corporation has imputed interest income.
E)None of the above.
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Chapter 5: Gross Income: Exclusions
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Q1) The CEO of Cirtronics Inc., discovered that the company's competitor had adopted a cafeteria plan for its employees. The CEO is concerned about retaining his talented employees and would like you to provide a brief explanation as to why a cafeteria plan may be attractive to the company's employees.
Q2) Agnes receives a $5,000 scholarship which covers her tuition at Parochial High School.She may exclude the $5,000 scholarship she received although the scholarship is to attend a private high school.
A)True
B)False
Q3) In December 2012, Emily, a cash basis taxpayer, received a $2,500 cash scholarship for the Spring semester of 2013. However, she did not use the funds to pay the tuition until January 2013.Emily can exclude the $2,500 from her gross income in 2012.
A)True
B)False
Q4) What are the tax problems associated with payments received by a wife from her deceased husband's employer? (Assume the wife renders no services to the employer.)
Q5) What Federal income tax benefits are provided for college students?
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Page 7
Chapter 6: Deductions and Losses: in General
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Q1) Under no circumstance can a loss on the sale of a personal use asset be deducted.
A)True
B)False
Q2) Because it has only one owner, any sole proprietorship is permitted to elect the cash method of accounting.
A)True
B)False
Q3) The only § 212 expenses that are deductions for AGI are those related to rent and royalty income.
A)True
B)False
Q4) If a vacation home is classified as primarily personal use (i.e., rented for fewer than 15 days), none of the related expenses can be deducted.
A)True
B)False
Q5) Assuming an activity is deemed to be a hobby, discuss the order and limits in which expenses must be deducted.
Q6) What losses are deductible by an individual taxpayer?
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Q1) An individual may deduct a loss on rental property even if it does not meet the definition of a casualty loss.
A)True
B)False
Q2) Al, who is single, has a gain of $40,000 on the sale of §1244 stock (small business stock) and a loss of $80,000 on the sale of § 1244 stock.As a result, Al has a $40,000 ordinary loss.
A)True
B)False
Q3) Last year, taxpayer had a $10,000 nonbusiness bad debt. Taxpayer also had an $8,000 short-term capital gain and taxable income of $35,000. If taxpayer collects the entire $10,000 during the current year, $8,000 needs to be included in gross income.
A)True
B)False
Q4) A personal casualty loss deduction may be allowed for losses resulting from termites.
A)True
B)False
Page 9
Q5) Why was the domestic production activities deduction (DPAD) enacted by Congress?
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Chapter 8: Depreciation, Cost Recovery, Amortization, and Depletion
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Q1) Taxpayers may elect to use the straight-line method under MACRS for personalty.
A)True
B)False
Q2) The only asset Bill purchased during 2012 was a new seven-year class asset.The asset, which was listed property, was acquired on June 17 at a cost of $50,000.The asset was used 40% for business, 30% for the production of income, and the rest of the time for personal use.Bill always elects to expense the maximum amount under § 179 whenever it is applicable.The net income from the business before the § 179 deduction is $100,000.Determine Bill's maximum deduction with respect to the property for 2012.
A)$1,428.
B)$2,499.
C)$26,749.
D)$33,375.
E)None of the above.
Q3) In a farming business, MACRS straight-line cost recovery is required for all fruit bearing trees.
A)True
B)False
Q4) Discuss the reason for the inclusion amount with respect to leased automobiles.
Page 10
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Chapter 9: Deductions: Employee and Self-Employed
Related Expenses
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Q1) A taxpayer who uses the automatic mileage method to compute auto expenses can also deduct the business portion of tolls and parking.
A)True
B)False
Q2) A participant who is at least age 59 1/2 can make a tax-free qualified withdrawal from a Roth IRA after a five-year holding period.
A)True
B)False
Q3) The § 222 deduction for tuition and related expenses is available:
A)Regardless of the amount of a taxpayer's MAGI.
B)To cover room and board expenses to attend college.
C)To a married taxpayer filing a separate return.
D)Only if a taxpayer does not claim the standard deduction.
E)None of the above.
Q4) In some cases it may be appropriate for a taxpayer to report work-related expenses by using both Form 2106 and Schedule C.
A)True
B)False
11
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) In 2012, Boris pays a $3,800 premium for high-deductible medical insurance for himself and his family. In addition, he contributes $3,400 to a Health Savings Account. Which of the following statements is true?
A)If Boris is self-employed, he may deduct $7,200 as a deduction for AGI.
B)If Boris is self-employed, he may deduct $3,400 as a deduction for AGI and may include the $3,800 premium when calculating his itemized medical expense deduction.
C)If Boris is an employee, he may deduct $7,200 as a deduction for AGI.
D)If Boris is an employee, he may include $7,200 when calculating his itemized medical expense deduction.
E)None of the above.
Q2) In January 2013, Pam, a calendar year cash basis taxpayer, made an estimated state income tax payment for 2012. The payment is deductible in 2012.
A)True
B)False
Q3) Linda borrowed $60,000 from her parents for a down payment on a condominium.She paid interest of $5,500 in 2010, $0 in 2011, and $9,000 in 2012.The IRS disallowed the deduction. Can you offer any explanation for the disallowance?
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Page 12
Chapter 11: Investor Losses
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Q1) Wolf Corporation has active income of $55,000 and a passive loss of $33,000 in the current year.Wolf cannot deduct the $33,000 loss if it is a closely held C corporation that is not a personal service corporation.
A)True
B)False
Q2) Judy incurred $58,500 of interest expense this year related to her investments.Her investment income includes $15,000 of interest, $9,000 of qualified dividends, and a $22,500 net capital gain on the sale of securities.The maximum amount of Judy's investment interest expense deduction for the year is:
A)$15,000.
B)$24,000.
C)$37,500.
D)$46,500.
E)None of the above.
Q3) Describe the types of activities and taxpayers that are subject to the at-risk rules.
Q4) When a taxpayer disposes of a passive activity by death, what happens to any unused passive losses?
Q5) What special passive loss treatment is available to real estate activities?
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Chapter 12: Tax Credits and Payments
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Q1) A FIFO method is applied to general business credit carryovers, carrybacks, and utilization of credits earned during a particular year.
A)True
B)False
Q2) Identify the statement below that is false.
A)If an employer is not required to withhold income taxes from an employee's wages, the wages are not taxable to the employee.
B)In certain situations, income tax withholding by an employer is voluntary.
C)An employer must deposit with the government an amount of FICA tax that is more than twice the amount withheld from the employee's salary (i.e., the employee's and employer's shares).
D)If an excess amount of FICA has been withheld for an employee because the employee has multiple jobs, the employee may claim a credit for the excess amount withheld on his or her income tax return.
E)None of the above.
Q3) Explain the purpose of the disabled access credit and describe the general characteristics of its computation.
Q4) Discuss the treatment of unused general business credits.
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Page 14
Chapter 13: Property Transactions: Determination of Gain or
Loss, Basis Considerations, and Nontaxable
Exchanges-Part 2
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Q1) Melissa, age 58, marries Arnold, age 50, on June 1, 2012.Melissa decides to sell her principal residence on August 1, 2012, which she has owned and occupied for the past 30 years.Arnold has never owned a house.However, while he was married to Kelly who died 6 months prior to his marriage to Melissa, Kelly used the § 121 election on the sale of her residence in January 2010 to reduce her realized gain from $123,000 to $0.Kelly used the sales proceeds to pay off Arnold's gambling debts.Can Melissa elect the § 121 exclusion on the sale of her residence? What is the maximum § 121 exclusion available to Melissa and Arnold if they file a joint return?
Q2) On January 5, 2012, Waldo sells his principal residence with an adjusted basis of $270,000 for $690,000.He has owned and occupied the residence for 15 years.He pays $35,000 in commissions and $2,000 in legal fees in connection with the sale.One month before the sale, Waldo painted the exterior of the house at a cost of $5,000 and repaired various items at a cost of $3,000.On October 15, 2012, Waldo purchases a new home for $600,000.On November 15, 2013, he pays $25,000 for completion of a new room on the house, and on January 14, 2014, he pays $15,000 for the construction of a pool.What is the Waldo's recognized gain on the sale of his old principal residence and what is the basis for the new residence?
Q3) Can related parties take advantage of the like-kind exchange provisions?
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Chapter 13: A: Property Transactions: Determination of Gain
or Loss, Basis Considerations, and Nontaxable Exchanges-Part 1
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Q1) A realized gain whose recognition is postponed results in the temporary recovery of more than the taxpayer's cost or other basis.
A)True
B)False
Q2) The basis of boot received in a like-kind exchange is its fair market value, unless the realized gain is a smaller amount.
A)True
B)False
Q3) Matt, who is single, sells his principal residence, which he has owned and occupied for 5 years, for $435,000. The adjusted basis is $140,000 and the selling expenses are $20,000. Three days after the sale he purchases another residence for $385,000. Matt's recognized gain is $25,000 and his basis for the new residence is $385,000.
A)True
B)False
Q4) The holding period for property acquired by gift is automatically long term.
A)True
B)False
Page 16
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Chapter 14: Property Transactions: Capital Gains and Losses,
1231, Recapture Provisions
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Q1) Mike is a self-employed TV technician.He is usually paid as soon as he completes repairs, but occasionally bills a customer with payment expected within 30 days.At the end of the year he has $2,500 of receivables outstanding.He expects to collect $1,200 of this and write off the remainder.Mike is a cash basis taxpayer and had net earnings from his business (not including the effect of the items above) of $55,000.He also had $3,500 interest income, $200 gambling winnings, and sold corporate stock for $7,000.The stock had been purchased in 2009 for $8,200.Mike is single, has no dependents, and claims the standard deduction.What is his 2012 taxable income? (Ignore the self-employment tax deduction.)
Q2) Casualty gains and losses from nonpersonal use assets are not netted against casualty gains and losses from personal use assets.
A)True
B)False
Q3) On January 10, 2012, Wally sold an option for $2,000 on vacant land he held as an investment.He had purchased the land in 2008 for $76,000.The option allowed the option holder to purchase the property for $122,000 plus the cost of the option.On March 1, 2012, the option holder exercised the option.What is the amount and nature of Wally's gain or loss from disposition of the land?
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Chapter 15: Alternative Minimum Tax
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Q1) The exercise of an incentive stock option (ISO) increases both the AMTI and regular taxable income in the year of exercise.
A)True
B)False
Q2) When qualified residence interest exceeds qualified housing interest, the positive adjustment required in calculating AMT is a timing adjustment.That is, in the future, there will be an offsetting negative adjustment.Comment on the validity of this statement.
Q3) Which of the following can produce an AMT preference rather than an AMT adjustment?
A)Standard deduction.
B)Research and experimental expenditures.
C)Percentage depletion.
D)Incentive stock options (ISOs).
E)None of the above.
Q4) What is the relationship between taxable income and AMTI?
The indirect method, rather than the direct method, is normally used to calculate the AMT (i.e., the starting point is taxable income).
Q5) Can AMT adjustments and preferences be both positive and negative?
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Chapter 16: Accounting Periods and Methods
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Q1) Related-party installment sales include all of the following except the first seller's:
A)Brothers and sisters.
B)Controlled corporations.
C)Lineal descendants and ancestors.
D)Partnerships in which the seller has an interest.
E)All of the above would be considered related parties.
Q2) In 2012, Beth sold equipment used in her business.Her basis in the property was $300,000 ($500,000 cost less $200,000 of depreciation).Beth sold the property for $400,000, with $100,000 due on the date of the sale and $300,000 (plus interest at the Federal rate) due in 2013.Beth's recognized installment sale gain in 2013 is:
A)$0.
B)$50,000.
C)$100,000.
D)$200,000.
E)None of the above.
Q3) What incentives do the tax accounting rules provide for taxpayers to voluntarily change from an incorrect method of accounting that has reduced the company's tax liability in prior years?
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Chapter 17: Corporations: Introduction and Operating Rules
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Q1) Which of the following statements is incorrect with respect to the treatment of net operating losses by corporations?
A)A corporation may elect to forgo the carryback period and just carryforward an NOL.
B)A corporation may claim a dividends received deduction in computing an NOL.
C)An NOL is generally carried back 2 years and forward 20 years.
D)Unlike individuals, corporations do not adjust their NOLs for net capital losses or nonbusiness deductions.
E)None of the above.
Q2) Orange Corporation owns stock in White Corporation and has net operating income of $400,000 for the year.White Corporation pays Orange a dividend of $60,000.What amount of dividends received deduction may Orange claim if it owns 15% of White stock (assuming Orange's dividends received deduction is not limited by its taxable income)?
A)$9,000.
B)$42,000.
C)$48,000.
D)$60,000.
E)None of the above.
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Page 20
Chapter 18: Corporations: Organization and Capital Structure
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Q1) In structuring the capitalization of a corporation, the tax law is neutral for the investor as to debt versus equity financing.
A)True
B)False
Q2) A city contributes $500,000 to a corporation as an inducement to locate in the city. Within the next 12 months, the corporation uses the money to purchase property. The corporation has income of $500,000 and must reduce its tax basis in the property by the same amount.
A)True
B)False
Q3) For transfers falling under § 351, what are the holding period rules for stock received by the shareholder and for the assets transferred to the corporation?
Q4) Tina incorporates her sole proprietorship with assets having a fair market value of $100,000 and an adjusted basis of $110,000.Even though § 351 applies, Tina may recognize her realized loss of $10,000.
A)True
B)False
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Chapter 19: Corporations: Distributions Not in Complete
Liquidation
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Q1) In determining whether a distribution qualifies as a § 303 redemption to pay death taxes, the stock attribution rules must be applied.
A)True
B)False
Q2) Hannah, Greta, and Winston own the stock in Redpoll Corporation (E & P of $900,000) as follows: Hannah, 600 shares; Greta, 400 shares; and Winston, 1,000 shares. Greta is Hannah's daughter, and Winston is Hannah's brother. Redpoll Corporation redeems 400 of Hannah's shares (basis of $55,000) for $240,000. Hannah purchased the stock three years ago as an investment. With respect to the stock redemption, Hannah has:
A)Long-term capital gain of $185,000.
B)Long-term capital gain of $240,000.
C)Dividend income of $185,000.
D)Dividend income of $240,000.
E)None of the above.
Q3) Goldfinch Corporation distributes stock rights to its shareholders. How is the basis of the stock rights received by Goldfinch's shareholders determined?
Q4) Explain the stock attribution rules that apply in the case of stock redemptions.
Q5) How does the payment of a property dividend affect E & P?
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Chapter 20: Corporations: Distributions in Complete
Liquidation and an Overview of Reorganizations
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Q1) Explain whether shareholders are exempted from gain/loss recognition in nontaxable corporate reorganization or the gain/loss recognition is merely postponed.If postponed, what is the vehicle for ensuring the postponed gain/loss will be recognized in the future?
Q2) Magenta Corporation acquired land in a § 351 exchange one year ago.The land had a basis of $320,000 and a fair market value of $350,000 on the date of the transfer.Magenta Corporation has two shareholders, Mark (70%) and Megan (30%), who are brother and sister.Magenta Corporation adopts a plan of liquidation in the current year.On this date, the land has decreased in value to $250,000.Magenta Corporation sells the land for $250,000 and distributes the proceeds pro rata to Mark and Megan.What amount of loss may Magenta Corporation recognize on the sale of the land?
A)$0.
B)$21,000.
C)$30,000.
D)$70,000.
E)None of the above.
Q3) What are the tax consequences of a § 332 liquidation to the parent corporation, subsidiary corporation, and minority shareholder?
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Chapter 21: Partnerships
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Q1) Which one of the following is not shown on the partnership's Schedule K on Page 4 of Form 1065?
A)The partnership's self-employment income.
B)The partnership's separately stated income and deductions.
C)The partnership's tax preference and adjustment items.
D)The partnership's net operating loss carryforward.
E)All of the above.
Q2) Melissa is a partner in a continuing partnership.At the end of the current year, the partnership makes a proportionate, nonliquidating distribution to Melissa of $50,000 cash, inventory (basis of $22,000, fair market value of $20,000), and land (basis of $30,000, fair market value of $60,000).Melissa's basis in the partnership interest was $90,000 before the distribution.What is Melissa's basis in the inventory, land, and partnership interest following the distribution?
Q3) Tyler's basis in his partnership interest is $110,000, including his share of partnership debt.Sarah buys Tyler's partnership interest for $60,000 cash and she assumes Tyler's $90,000 share of the partnership's debt.If the partnership owns no hot assets, Tyler will recognize a capital loss of $50,000.
A)True
B)False
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Page 24
Chapter 22: S: Corporations
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Q1) Compensation for services rendered to an S corporation is subject to FICA taxes.
A)True
B)False
Q2) Randall owns 800 shares in Fabrication, Inc., an S corporation in Moss Hill, Texas.In 2012, his basis in his stock is $30,000, before the adjustment for this year's losses.During 2012, Randall's share of the corporation's ordinary loss is $20,000 and his share of its capital loss is $15,000.How much can Randall deduct due to these losses?
A)No deduction.
B)$15,000 ordinary loss; $10,000 capital loss.
C)$17,143 ordinary loss; $12,857 capital loss.
D)$20,000 ordinary loss; $15,000 capital loss.
Q3) Which of these tax provisions does not apply to an S corporation?
A)Section 1244 stock.
B)"Partial liquidation" stock redemption.
C)Tax-free "A" reorganization.
D)Section 1202 capital gain exclusion.
Q4) An S corporation can claim a deduction for its NOL carryovers.
A)True
B)False
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Chapter 23: Exempt Entities
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Q1) Which of the following requirements must be satisfied for a bingo game to be classified as not being an unrelated trade or business?
A)The bingo game is legal under both state and local law.
B)The bingo game is conducted by volunteers.
C)For-profit bingo games ordinarily are not permitted in the jurisdiction.
D)Only a.and b.must be satisfied.
E)Only a.and c.must be satisfied.
Q2) Are some exempt organizations eligible to be recipients of contributions for which the donor does not qualify for a charitable contribution deduction?
Q3) Discuss any negative tax consequences that result from an exempt organization being classified as a private foundation.
Q4) For purposes of the unrelated business income tax, debt-financed property is all property of the exempt organization that is held to produce income and on which there is acquisition indebtedness.
A)True
B)False
Q5) If an exempt organization is required to file an annual information return, on what form is it filed?
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Page 26
Chapter 24: Multistate Corporate Taxation
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Q1) Typically exempt from the sales/use tax base is the purchase of lumber by a do-it-yourself homeowner, when she builds a deck onto her patio.
A)True
B)False
Q2) A state sales/use tax is designed to be collected by the ____________________ (seller/purchaser) of the product and then remitted to the state.
Q3) A unitary business applies a combined apportionment formula, including data from operations of all of the affiliates.
A)True
B)False
Q4) The property factor includes land and buildings used for business purposes. A)True B)False
Q5) All of the U.S.states use an apportionment formula based on the sales, property, and payroll factors.
A)True B)False
Q6) An ad valorem property tax is based on the asset's current
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Chapter 25: Taxation of International Transactions
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Sample Questions
Q1) With respect to income generated by non-U.S.persons, does the U.S.apply a "worldwide" or a "territorial" approach. Be specific.
Q2) Which of the following statements best describes the purpose of § 482, under which the Treasury can reallocate income and deductions among related taxpayers?
A)To provide tax benefits to U.S.multinationals that export U.S.produced property.
B)To allow the IRS to select the best method for determining transfer prices for U.S.taxpayers.
C)To alleviate double taxation problems generated by related entities doing business in two or more countries.
D)To place a controlled entity on a tax parity with an uncontrolled entity with regard to prices charged by the entities.
Q3) The IRS can use § 482 reallocations to assure that transactions between related parties are properly reflected in a tax return.
A)True
B)False
Q4) Discuss the primary purposes of income tax treaties.
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Page 28
Chapter 26: Tax Practice and Ethics
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Q1) When a practitioner discovers an error in a client's prior return, AICPA tax ethics rules require that an amended return immediately be filed.
A)True
B)False
Q2) The tax preparer penalty for taking an unreasonable tax return position is the greater of $____________________ or ____________________ of the tax professional's income from preparing the return.
Q3) Which statement appearing below does not correctly describe the IRS letter ruling process?
A)They are issued by the Secretary of the Treasury Department.
B)Some letter rulings are of such importance and general interest that they are later published (in anonymous form) as Revenue Rulings.
C)Letter rulings are private and can be seen only by the taxpayer who requested the ruling.
D)Letter rulings can benefit both taxpayers and the IRS.
Q4) An individual is not subject to an underpayment penalty until more than $____________________ is due and unpaid through estimated taxes. or
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Chapter 28: Income Taxation of Trusts and Estates
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Q1) Beneficiary information concerning a trust's income and distributions are conveyed on Schedule ____________________ of the Form 1041.
Q2) In computing Federal taxable income, can the trust or estate use its distributable net income (DNI) as its deduction for distributions to beneficiaries? Explain.
Q3) A fiduciary's cost recovery deductions are assigned corresponding to the disposition of entity ____________________ income for the year.
Q4) The Bard Estate incurs a $25,000 fee in disposing of the real property of the decedent. The deduction is claimed against the Federal estate tax, unless by election it is claimed on the estate's income tax return.
A)True
B)False
Q5) Generally, capital gains are allocated to fiduciary income, because they arise from current-year transactions as directed by the trustee.
A)True
B)False
Q6) The Form 1041 of a calendar-year trust is due on ____________________ 15.
Q7) The IRS encourages ____________________ filing for Forms 1041.
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